Wednesday, October 3, 2018

Uganda raises rate 100 bps on growing inflation pressure

Uganda's raised its Central Bank Rate (CBR) by 100 basis points to 10.0 percent as inflationary pressures are now higher than expected due to rapidly rising oil prices, a weaker exchange rate of the shilling and an array of indirect taxes on mobile money transactions and voice and messaging services over the internet.
The Bank of Uganda (BOU), which had cut its rate in February by 50 basis points to boost economic growth, said a "modest" tightening of monetary policy was warranted to keep inflation close to its 5.0 percent target.
Uganda's inflation rate eased slightly to 3.7 percent in September from 3.8 percent in August due to lower food prices but BOU noted core inflation had jumped to 3.9 percent in September from 0.8 percent in June due to higher services prices.
Services prices have risen in response to the Over-The-Top (OTT) tax, a 200 shilling daily tax on voice and messaging services by such providers as Facebook, WhatsApp, Twitter and Instagram. The tax on social media from July 1 was imposed to curb gossip among its users. Earlier the government passed a 1 percent excise duty on mobile money transactions.
"Higher fuel prices and strong domestic demand could push services inflation higher in the remaining part of 2018," BOU said.
The central bank raised its forecast for core inflation to peak in the range of 6.5 to 7.5 percent in the second half of 2019 unless it cut the rate now. In the first half of 2020 core inflation is expected to ease and stabilize around 5 percent, with the positive output gap expected to the key inflation driver.
Economic activity in Uganda has been solid since the second half of last year, with the BOU's composite index of economic activity suggesting economic growth in the current 2018/19 fiscal year, which began July 1, of about 6.5 percent.
Uganda's economy expanded by 6.4 percent year-on-year in the first calendar quarter of 2018, unchanged from the previous quarter.
A key risk to the inflation outlook stems from the exchange rate, which remains vulnerable to tighter global financial conditions and stronger domestic demand. Food prices are not seen as a major risks but remain dependent on weather and therefore uncertain.
The shilling has been depreciating steadily since early 2017 and fell sharply in June before bouncing back. Today the shilling was trading at 3,815 to the U.S. dollar, down 4.8 percent this year.